How quickly the tide turns. Just a few short months ago, the mass media hype targeted the 401(k) arena. Things were going so bad in the PR department for the popular retirement plan, some even accused the 401(k) of being nothing more than a supersized Ponzi scheme. As unbelievable as it sounds, voices declared the 401(k) "Dead on Arrival" and began demanding the return of the pension plan.
But then the Wisconsin winter struck, breaking a dam of pent-up frustration and taxpayer angst. First the Cheese State, then Indiana, then Ohio and now Massachusetts, still a bastion of Democrats, all these states (and many others) shed the bloom of the Emperor's new clothes when it comes to public employee unions. In the end, the 401(k) was alive and well – and working! It was the long ignored pension that appears to have been assigned to the dustbin of history.
This brings us to Washington's infamous third rail – Social Security. As early as the 1980s, when a bipartisan panel swept the dirt under the rug and "saved" FDR's safety net, many already knew Social Security was the real Ponzi scheme. All it would take was the retirement of the baby boomers for the thing to meet its ultimate fate. Back then, we had a chance to save the retirements of the mid-to-late baby boomers by having them opt out of Social Security and into a defined contribution plan. But the third rail loomed large, threatening to sizzle anyone who ventured too close.
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While America chose not to answer opportunity's knock, a then-laughably correct third world banana republic did not.
A recent article in Investor's Business Daily celebrates the 30th anniversary of Chile's Private Social Security System. Here are some of the key take aways from that story:
- Unlike American workers who pay a Social Security payroll tax of 12.4%, Chilean workers must send only 10% to their Private Social Security accounts.
- While Americans earned a theoretical 1-2% annual return on Social Security, over the last 30 year, Chileans have earned an average 9% annual return in their Private Social Security accounts.
- Where the American government regularly "borrows" from Social Security (normally a prohibited transaction under trust law), the Chilean constitution prohibits the government form seizing Private Social Security accounts.
The most interesting aspect of the Investor's Business Daily article referenced a 2005 story by then-New York Times columnist John Tierney. This was a rubber-meets-the-road kind of article. Tierney ran different retirement scenarios based on the American Social Security system versus the Chilean Private Social Security system. In each case, he assumed he'd put roughly the same amount of his salary into each system. Here are the results of each scenario:
- If he retires at 62, Chile's Private Social Security account gives him an annual pension of $55,000, three times more than the $18,000 he'd get from America's Social Security.
- If he retires at 65, Chile gives him an annual pension of $70,000 (or an annual pension of $53,000 with a lump-sum payment of $223,000) versus the $25,000 America would give him (but only if he retired a year later).
In each case, Tierney comes out well ahead using Chile's system versus America's. And this analysis was published more than five years ago – in the New York Times no less. Why hasn't this been at the forefront of the political discussion? I know the New York Times has lost readers, but I didn't think it lost that many!
Ironically, the DOL and the SEC – i.e., the United States Government – are seeking to refine the definition of the fiduciary standard to compel all investment providers to act in the best interest of their investor clients. The anniversary of Chile's Private Social Security program causes us to reflect and ask, "Is the U.S. Government acting as a good fiduciary for its retirement beneficiaries?"
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Christopher Carosa
Chris Carosa has been writing a weekly article and monthly column for BenefitsPRO online and BenefitsPRO Magazine since 2011 and is a nationally recognized award-winning writer, researcher and speaker. He’s written seven books, including From Cradle to Retire: The Child IRA; Hey! What’s My Number? – How to Increase the Odds You Will Retire in Comfort; A Pizza The Action: Everything I Ever Learned About Business I Learned By Working in a Pizza Stand at the Erie County Fair; and the widely acclaimed 401(k) Fiduciary Solutions. Carosa is also Chief Contributing Editor of the authoritative trade journal FiduciaryNews.com and publisher of the Mendon-Honeoye Falls-Lima Sentinel, a weekly community newspaper he founded in 1989. Currently serving as President of the National Society of Newspaper Columnists and with more than 1,000 articles published in various publications, he appears regularly in the national media. A “parallel” entrepreneur, he actively runs a handful of businesses, including a small boutique investment adviser, providing hands-on experience for his writing. A trained astrophysicist, he also holds an MBA and has been designated a Certified Trust and Financial Advisor. Share your thoughts and story ideas with him through Facebook (https://www.facebook.com/christophercarosa/)and Twitter (https://twitter.com/ChrisCarosa).
